Detailed explanation of new law

‘At the end of the income
year, the company has a deficit of $80,000 in its franking and is
liable to franking deficit tax.’

With:

‘At the end of the income
year, the company has a deficit of $80,000 in its franking account
and is liable to franking deficit tax.’

In addition, the following change is
to be made to further explain the operation of the provisions.

Remove paragraph 5.15 and substitute
a new paragraph 5.15. Also insert new paragraph 5.16 and new
Example 5.3:

5.15 This measure was announced
by the former Minister for Revenue and Assistant Treasurer in Press
Release No. 30 of 10 May 2005. That press release
stated that the Commissioner’s discretion would apply
‘where, broadly, events that caused the over franking were
outside of the company’s control or were unanticipated, and
did not involve any broader exploitation of the imputation
system’. Subsection 205-70(6) has not been drafted
using the same words as the press release. However, it is
considered that the wording of the subsection has the same effect
as the wording in the press release.

5.16 That is, an event that is
outside an entity’s control includes (but is not limited to)
an event that is unanticipated. In addition, in exercising
the discretion, the Commissioner must consider whether the taxpayer
has any broader intention to exploit the imputation system.
That is, if the deficit in the franking account arose in
circumstances where the taxpayer intended to exploit the imputation
system, the events that gave rise to the deficit would be within
the taxpayer’s control and the Commissioner’s
discretion would not be exercised.

Example 5.3

A company pays a fully franked dividend part
way through an income year (with a resulting debit to its franking
account) in the reasonable expectation that its future quarterly
PAYG instalment payments in the income year would be sufficient to
ensure that it would not have a deficit in its franking account at
the end of the income year. An unexpected downturn in
business results in the company’s future quarterly PAYG
instalment payments being less than expected. Consequently,
the company has a deficit in its franking account at the end of the
income year.

The franking
deficit arose in circumstances that were unanticipated and beyond
the company’s control. In addition, the company had no
broader intention to exploit the imputation system.
Therefore, the Commissioner would exercise his discretion and make
a determination so that the 30 per cent franking deficit
tax offset reduction would be disregarded .’